In a recent article at the NY Times Gary Becker and Kevin Murphy explained how the U.S. Government has set a bad reference saving banks that failed. It is easy to agree further with them, all of us who praise market as a superior allocation mechanism can go harsh on the current administration, why won't they use chapter eleven or some bankruptcy tool? Letting them disappear.
Although I usually would agree with this view, I think that the alternative would have been economic depression. It is true, all plans to stimulate the economy are inherently imperfect, however, the common phrase "doing nothing is not an alternative" is most appealing now. Martin Wolf has recently put a lot of work in making a case for coordinated action next April in London, in an extremely opposite approach.
Three questions remain: can a country with high debt spend it's way out of recession? Can a non-Ponzi game condition not be imposed to countries? Can the U.S. take advance of its seniorage position forever?
The immediate answer is: as long as there is a creditor, this country can do it. There is an underlying assumption here: the money borrowed will make the economy growth enough to allow debt re-payment. Moreover, there is another effect, the latter increase in bond supply should press interest rate in the opposite direction than the one desired by the FED, how this should be addressed?
John Cochrane offers a feasible solution. Lasts week announcement by the FED, saying it would buy 300 billion dollars of public debt, can be the first step into Cochrane's solution. The remaining step is in the Treasury's side, it could now buy first quality debt issuing public debt instead.
This measure should have two major features. First, it should help the U.S. to change external public debt for national, deleveraging from China and forcing it to spend (or appreciate its currency). Second, it is far easier to remove bonds from public than social programs, this is, when recession ends, government spendig should be reduced, and bonds provide an easier mechanism to do it.
Thus, Cochrane's proposal should not be dismissed and it deserve further analysis. Although it is fairly straight that the U.S. can issue as much debt as it needs as long as there exists a huge trade surplus at China, a central point should be to securing Treasuries reputation as the safest asset, Ponzi games can destroy this reputation causing caos. Furthermore, all efforts to make the economy grow should always be evaluated in the face of future inflation, history has shown that great increases in money supply will end up reflecting higher prices.
Although I usually would agree with this view, I think that the alternative would have been economic depression. It is true, all plans to stimulate the economy are inherently imperfect, however, the common phrase "doing nothing is not an alternative" is most appealing now. Martin Wolf has recently put a lot of work in making a case for coordinated action next April in London, in an extremely opposite approach.
Three questions remain: can a country with high debt spend it's way out of recession? Can a non-Ponzi game condition not be imposed to countries? Can the U.S. take advance of its seniorage position forever?
The immediate answer is: as long as there is a creditor, this country can do it. There is an underlying assumption here: the money borrowed will make the economy growth enough to allow debt re-payment. Moreover, there is another effect, the latter increase in bond supply should press interest rate in the opposite direction than the one desired by the FED, how this should be addressed?
John Cochrane offers a feasible solution. Lasts week announcement by the FED, saying it would buy 300 billion dollars of public debt, can be the first step into Cochrane's solution. The remaining step is in the Treasury's side, it could now buy first quality debt issuing public debt instead.
This measure should have two major features. First, it should help the U.S. to change external public debt for national, deleveraging from China and forcing it to spend (or appreciate its currency). Second, it is far easier to remove bonds from public than social programs, this is, when recession ends, government spendig should be reduced, and bonds provide an easier mechanism to do it.
Thus, Cochrane's proposal should not be dismissed and it deserve further analysis. Although it is fairly straight that the U.S. can issue as much debt as it needs as long as there exists a huge trade surplus at China, a central point should be to securing Treasuries reputation as the safest asset, Ponzi games can destroy this reputation causing caos. Furthermore, all efforts to make the economy grow should always be evaluated in the face of future inflation, history has shown that great increases in money supply will end up reflecting higher prices.
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